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reflections

Jul 2, 2008 | 01:44 GMT

4 mins read

Geopolitical Diary: The Economic and Political Effects of an Iranian Threat

It can be difficult to separate the important from unimportant on any given day. Reflections mean to do exactly that — by thinking about what happened today, we can consider what might happen tomorrow.
The rumors and denial of rumors continue to swirl around Iran. Endless leaks of decisions made by the United States and/or Israel to strike at Iran's nuclear facilities continue. In the latest variants, Americans warned that Israel might already have decided to attack Iran, with the date set sometime between the U.S. election and Inauguration Day. Or it might be the Americans attacking. It is not clear what effect this is having on Iran, but it is certainly making others players nervous, not the least of which are the oil markets. There is an important interaction going on between two geopolitical elements. One is the attempt by Israel and the United States to force the Iranians to capitulate on the nuclear issue by convincing them that an attack is inevitable if they don't. The other is the impact of oil prices on the global economy and thereby on international power relations. An attack on Iranian nuclear facilities would obviously spike oil prices. The real question would be whether that spike in prices would last and how high it would go. The answer to that question rests in what the Iranians would do in response. The Iranians have now been duly warned that an attack is coming. One would think that they have considered their response. The obvious response, if the Iranians are capable of it, would be to block the Strait of Hormuz, through which Saudi and Kuwaiti oil flows to the world markets. The obvious means for this, as we discussed in an analysis Tuesday, would be to mine the Strait. That might not be as easy as it appears, since the U.S. Navy could deploy in the Strait en masse and block any Iranian ship that might try to approach the channel. But the Iranians would likely retain the ability to mine parts of the Persian Gulf itself. Iran has a long coast and a lot of small boats. It wouldn't take much to scatter mines. Most importantly, it would not have to be effective. The mere possibility of mines — the uncertainty factor — would not only slow down the movement of tankers in the Gulf, but also spike insurance rates. Tankers cost a lot of money and their cargoes these days are incredibly expensive. Risking both ship and cargo is not something tanker owners like to do. They buy insurance. If the possibility of mines in the Gulf existed, insurance rates would not only rise, but might become altogether unavailable. Insurance and re-insurance companies these days do not have enormous appetites for unpredictable risk involving large amounts of money. And without insurance, as we saw during the tanker wars in the 1980s, owners won't take the risk themselves. Iran's counter could be to increase the potential risk to the point where insurers back off. At that point, governments would have the option of insuring tankers themselves. Given how quickly governments move, particularly in what would have to be an international undertaking, oil supplies could be disrupted for days or even weeks. At this point, speculators and psychology aside, prices would spike dramatically. The creaking sound would turn into a cracking sound for the world economy. Herein lies the fear for markets. The longer the psychological warfare goes on, the more nervous they will become and the more pressure there will be on the global economy. The thought of this going on until after the November election may or may not panic the Iranians. But it is certainly worrying the markets at a time when the markets should be calmed. It is hard to figure out whether months of uncertainty or rapid action would have more soothing results. Conducting an extended psychological campaign against Iran makes complete politico-military sense. It does not make politico-economic sense. It creates a massive unknown in a situation where no action may actually be taken. Here is the problem. It is clear that Israel and the United States don't really want to attack Iran. If they wanted that, they would shut up and do it. But that's a guess. So the markets must take into account a possible attack and an Iranian counter. Hitting Iran fast, taking the hit and then calming the markets by showing that the Iranians can't disrupt tanker traffic makes more sense from an economic standpoint than constantly creating unknowns. The problem is that neither Israel nor the United States is certain that Iran can't disrupt tanker traffic. And they don't want Iran to have nuclear weapons. Some decisions have to be made. Attack, don't attack — but stop threatening to attack.

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